EQUITY STRIPPING

Equity Stripping removes equity from assets by using the asset to secure loans obtained from other asset protection devices.

Example: You give your Family Limited Partnership (FLP) a second trust deed on your home as security for a loan it gives you. Suppose you and I agree to become 50/50 partners. We agree to each put in $200,000 for our respective 50% interest. I put in $200,000 and receive my 50% interest. You put in a $200,000 promissory note for your 50% interest. The FLP places a $200,000 trust deed or mortgage on your home to secure your promissory note.

Equity stripping is an effective form of asset protection. It is designed to protect equity in real estate or business assets from a potential future claim.

q Real Estate.

A loan to your FLP can be secured by a real estate lien. The lien strips equity out of the real estate and protects it within your bank, your FLP.

q Businesses and Professional Practices.

Businesses and Professional Practices have considerable value locked inside them in the form of accounts receivable and equipment. A lawsuit against the business or professional practice filed by an employee or client or patient, exposes these assets to risk of loss. A loan to your FLP can be secured by a Uniform Commercial Code lien. The lien or loan strips equity out of the equipment and protects it within your bank, your FLP.

Other Assets, Inventory, Equipment, Accounts Receivable and Intellectual Property.

These assets can also be liened and equity stripped to protect them from the risks of the business.

Equity stripping moves the value of an asset into a protected position. Ownership of the underlying property remains the same and need not be transferred. This is a clear advantage in many situations:

Ownership of Several “Dangerous” (Liability Producing) Assets.

If you place deeds to several properties into a FLP or an LLCL, an injury caused by one property will infect all.

Why not place safe liens on multiple assets. Act the way a bank acts. Avoid the inconvenience and cost associated with forming several entities. Equity stripping protects the equity in a property from a claim arising out of the property itself.

Avoid Proposition 13 (California) and Other Transfer related Issues.

Equity Stripping avoids a transfer of ownership and issues with increased property taxes, transfer taxes and due on sale clauses from a lender.

 

Examples of Equity Stripping.

Client owns five small apartment buildings. Rental real estate is a dangerous asset, creating potential lawsuit liability from tenants, visitors and children. There are several possible asset protection plans:

One Entity.

All the properties can be placed into one FLP or LLC. The Client is protected from liability associated with the properties. The downside is that the equity of all the properties is available to satisfy a claim arising from any property. If someone is injured at one property and successfully sues the entity owner, the equity of all properties is exposed.

Multiple Entities.

We could form six entities and transfer each property to its own entity. A liability produced by one property would not infect the others. Neither the other properties nor the Client would be exposed. The downside is: (i) that that one property is totally exposed, (ii) the client must form multiple entities, and (iii) the cost, complexity and business confusion is avoidable.

Equity Stripping.

We need form but one entity to limit the Client’s exposure to liability from all of the properties. None of the properties is at risk. If the Client is sued, virtually 100 percent of the properties equity has been protected.